Confronted with ever intensifying international competition, enterprises in China, whether state-owned or not, have to make adjustments constantly in order to keep abreast with the ever changing market conditions. In business operation they must follow the market rules without relying on the government for protection. Experience from 24 years of reform and opening up shows that government's protection does not take effect squarely. It is the industries without or receiving little protection that are actually more competitive, such as household appliances, textile and light industry. Presently some brands of Chinese household appliances are in no way inferior to the famous brands from Japan, Korea and Europe in terms of both function and quality. The manufacturers in these industries are beginning to enter the international market. On the other hand, those highly monopolized industries that received more administrative protection, such as telecommunications and financial services are precisely the ones that found it difficult to sustain the pressure of competition from outside. Therefore, China's enterprises must get rid of the psychological reliance on government's protection in order to operate in accordance with the market rules. They must change their perception and system in the operation of enterprises, so as to put themselves amidst the international competition. This being done, in-depth development of China's enterprises' marketization is assured.

(I)Non-State Owned Sector

1.Future Changes in Policies, Rules and Regulations and Economic Environment Relating to the Non-State Owned Sector

The 16th National Congress of the CPC convened in November 2002 stated that it is necessary for us to unswervingly "encourage, support and guide the development of the non-public sectors of the economy"; "We should expand the areas for the market access of domestic nongovernmental capital and adopt measures with regard to investment, financing, taxation, land use, foreign trade and other aspects to carry out fair competition"; "We should improve the legal system for protecting private property"; "We should improve the environment for investment, grant national treatment to foreign investors and make relevant policies and regulations more transparent"; "We should establish the principle that labor, capital, technology, managerial expertise and other production factors participate in the distribution of income in accordance with their respective contributions". Such policies greatly improved the strength of support to the non-state owned sector, and the non-public sector in particular.

After the 16th National Congress of the CPC, some laws and regulations in consistency with the international practice and beneficial to the development of the national economy will be put forward and perfected. First of all, the much talked about the Civil Code of New China had been submitted to the highest legislative body of the country for deliberation and will be promulgated very soon. In Order to improve the legal system for protecting private property, the Civil Code (Draft ) devoted a whole chapter to the private ownership, clarifying the basic principle relating to property ownership law and regulations for protecting the property ownership, which are applicable to properties of both citizens and non-public enterprises. According to the draft, the private owner-ship as referred to by the Code includes the rights of natural persons and the non-public economic entities such as the individual sector and private sector to have full disposition of their immovable or movable properties. Secondly, policies and regulations in discrimination of the development of the individual and private sectors are to be cleared and abolished, and to be replaced by those amended and improved to support and encourage their development. The individual and private sectors are to be guided and supported in their "secondary pioneering" in terms of establishing the prestigious status of their products, in accelerated asset restructuring and combining, in active participation in international competition, in continuously improving their own quality for bringing about qualitative developments, and in improving their competitiveness. Further more, the Interim Provisions on the Restructuring of State-Owned Enterprises by Using Foreign Funds was promulgated in November 2002 and were to be enforced for 1 January 2003. Together with the Circular on Relevant Issues Concerning Transferring Listed State-Owned Stocks and Legal Person Stocks to Foreign Businesses, they form China's policy system in relation to restructuring state-owned enterprises by utilizing foreign funds, and will have important influence in adjusting and optimizing the layout pattern of the state-owned sector.

The year 2003 will be the second year since China's admission to the WTO. According to the Protocol for Joining the WTO and the working group's reports, China will open an even wider range of fields to the foreign businesses in the second year after joining the WTO. For instance, the minimum registered capital for a wholly China-owned enterprise to carry out foreign trade will be reduced to 3,000,000 yuan; Sino-Foreign equity joint-ventures with the foreigner holding minority shares will have full right in carrying out foreign trade; the non-discriminative treatments between production of products for domestic sales and those for export and between export products and imported products are to be abolished; national treatment is to be given to the imported products; controls on service trades such as business, telecommunications, sales agency and financing are to be further relaxed, so that foreign investments are expanded to over 50 percent in some cases. This means that China will gradually and eventually fit into the economic globalization system. China's enterprises will engage in heated competition with a wider range of enterprises from all countries, including those from the developed countries, and on a higher level.

2. Development Trend of the Non-State Owned Sector

(1) Non-state Owner Sector to Enter a Wider Range of Fields

The market access of the non-state owned sector is accompanied by the strategic adjustment of the state-owned sector. For the state-owned sector, the important aspect of the strategic adjustment is to exit from most of the competitive industries, and where the state-owned sector has phased out, there will certainly be access of the non-state owned sector. On the one hand, a large number of state-owned medium and small sized enterprises, especially the small ones, are directly transformed into non-state owned enterprises; on the other, the large and medium sized state-owned enterprises are transformed into state controlled enterprises with diversified property rights, which is not possible without participation by the non-state owned sector. Meanwhile, as a member of the WTO, China must keep observance of the two fundamental rules of market access and national treatment of the WTO. China will grant same treatment to China's enterprises including those with foreign funds, foreign enterprises in China and other non-state owned enterprises. This means that market access and production and operation conditions in all competitive industries must be equally available to all enterprises, regardless of the type of ownership and the source of capital. According to the commitments made by China, non-discriminative treatment is guaranteed in prices and availability of goods and services provided by the industries including traffic and transportation, energy, basic telecommunications and other facilities and factors for production. Under such circumstances, the non-state owned sector will enter the fields once monopolized by the state-owned sector and compete with them on equal terms.

(2) Property Rights of Non-state Owned Enterprises More Distinct and Diversified with More Standardized Production and Operation Activities

In the second year after joining WTO, China as a WTO member feels the necessity to accelerate the ownership transformation of enterprises, although there is no such requirement by the WTO on its members. Enterprises are to be transformed at an accelerated pace into joint stock limited companies with diversified property rights in accordance with the requirements of the modern enterprise system. Concerning non-state owned enterprises, even if their property rights were distinctly divided, they have to be reformed in accordance with the requirement of the modern enterprise system in order to fit into the competitive environment of market globalization. Confronted with such global competitive environment, non-state owned enterprises, especially the family enterprises, must absorb more investing parties to achieve expanded scale and enhanced competitiveness. And in order to keep sustainable vitality, non-state owned enterprises must as well strictly follow the market rules and relevant rules and regulations. They must design their corporate governance and incentive and restraining mechanisms to meet the requirements of market competition, the property rights and corresponding benefits of each investing entity must be clearly defined, and production and operation behaviors standardized.

(3) Businesses with Direct Foreign Investment or Wholly Foreign-owned to Increase Rapidly

China's accession to the WTO and the promulgation of policies for attracting foreign investment will inevitably trigger off an influx of transnational companies into China, intensifying the impact on China's domestic enterprises. After 24 years of reform and opening-up, many well-known large foreign enterprises established equity joint-ventures, contractual joint-ventures and wholly owned enterprises in China, and their products are occupying a larger and larger market share, significantly influencing China's economic development. Over the years, policies and measures adopted by the government such as high tariffs, product buy-back system and project examination and approval system effectively protected the domestic enterprises, so that some industries have acquired relatively high international competitiveness, especially in nurturing such enterprises groups like Haier, Baoshan Steel Works and Changhong. After joining the WTO, tariff rates will be sharply cut down and the government's administrative measures will be further weakened or even withdrawn. For many domestic enterprises whether to engage in face-to-face competition with foreign enterprises for survival and development will be a decision of vital importance. Currently there is a surge in the number of exclusively foreign invested businesses in China, while in the past they were mainly on equity or contractual joint-venture terms with China's enterprises. In 2002, the contract value of equity or contractual joint-ventures by foreign businesses in China amounted to US$27.765 billion, which however dropped to US$25.837 billion in 2001; on the other hand, the total contract amount of direct foreign investment rose from US$34.309 billion in 2000 to US$42.999 billion in 2001, by an increase of 25.33 percent. This means that even on the domestic market there will be ever more fierce competition between China's enterprises and large foreign enterprises.

It is expected that the role of the non-state owned sector in China's economic development will continuously be reinforced, and will make further contribution to the growth of national economy.

(Ⅱ) State-owned Enterprises

1. Future Changes in Policies, Rules and Regulations and Economic EnvironmentRelating to the State-owned Sector

Concerning the market-oriented reforms of state-owned enterprises, the 16th National Congress of the CPC put forward that it is necessary to establish a state property administration system that satisfies the market requirements. "The state should make laws and regulations and establish a state property management system under which the Central Government and local governments perform the responsibilities of investor on behalf of the state respectively l enjoying owner's equity, combining rights with obligations and duties and administering assets, personnel and other affairs"; "Governments at all levels must strictly abide by the laws and regulations concerning the management of state property, persisting in the separation of government functions from enterprise management and separation of ownership from management so that enterprises can operate independently, assume sole responsibility for their profits or losses". The property diversification reforms of state-owned enterprises are to be further propelled. "Except for a tiny number of enterprises that must be invested wholly by the state, all the others should introduce the joint-stock system to develop a mixed sector of the economy. Sources of investment must be diversified. The controlling shares in lifeline enterprises must be held by the State".

Two laws will be launched after the 16th Congress of the CPC, i.e. the Law on the Administration of State Property, which will stipulate the exclusive contributor status of the state property in order to truly separate the government administration from enterprises management, and the Bankruptcy Law. In today's world, whether there is well-developed enterprise bankruptcy system or not has become an important sign in assessing how well a country's market economy has developed. After 15 years of trial use, the existing bankruptcy law of China is found evidently in contradiction with the reality of China's reforms, and a more mature bankruptcy law is eagerly expected. The writing of the new Bankruptcy Law (Draft), which underwent three major modifications and amendments, and was subject to comments and suggestions from various government departments, provinces and municipalities, has already been completed. The new Bankruptcy Law grants equal treatment to both state-owned and non-state owned enterprises since the irreplaceable status of state-owned enterprises has perished. With the infusion of foreign and private funds, the issue of state-owned enterprises is no longer a dilemma. With China's joining the WTO and fitting into the global economy, state-owned enterprises, like the non-state owned ones, will have to participate in the competition on a higher level, except that state-owned enterprises have to face severe challenges from more aspects in more fields.

2. Trend of Marketization of State-Owned Enterprises

(1)Further Separation of Government Role from Capital and Enterprises Management

A new management system for state property will be established in 2003 together with the issuance of relevant laws. The new system will establish the exclusive representative of the state property, so that the chronic problem in which a number of departments fought for owning the assets will be solved. The contributor of state property will be specified, which, in such capacity, will exercise the powers and enjoy the benefits of the owner but will not behave like an administrator. By specifying a contributor the distinction between government and enterprises will be basically finalized. The government's control of resources and monopoly of industries will be considerably weakened, leaving stat-owned enterprises with much more autonomy in decision-making on all external and internal issues. When split away from managing capital, the government will devote more efforts in cultivating the market system, in creating a favorable external environment for enterprises, and in providing support for enterprises to establish a modern enterprise system.

(2)Transformation of Large and Medium Stat-Owned Enterprises into Joint Stock Limited Companies to Be Conducted in Deeper Dimensions

The establishment of modern enterprise system is the natural requirement for developing socialized mass production and market economy, in which direction the reforms of state-owned enterprises are to be conducted. In the days to come, except for some special fields (that are of national security and vital economic significance), the large and medium state-owned enterprises will mostly be transformed into non-wholly-state-owned enterprises, with further diversification of investing entities and clarification of property rights, and to establish a scientific and effective corporate governance and an incentive and restraining mechanism that are entirely free of government control. The standardized operation of enterprises requires changing the operational mechanism, so that the adaptability and competitiveness of enterprises will be improved.

(3)Behavior of State-owned Enterprises to Be More Market-Oriented and Standardized

At present, the behavior of state-owned enterprises is already highly market-oriented in respect of factor procuring and price setting. However, there are still some non-market elements in the corporate governance, particularly in the large state-owned enterprises. For instance, quite a number of Managers are subject to government appointment or removal, and the distribution of the managers' incomes is still based on the government set standards. With the government stepping back from management of capital and business, such situations will be greatly reduced. The Managers will more often be selected from the growing market of professional managers, and the wages of them will be determined at the BOD's own discretion. At the same time, a mechanism in which the managing institutions of the company are conditioning each other will be further improved the gradually standardized.

(4)State-owned Medium and Small Enterprises, Particulary the Small Ones, to Exit the State-Owned Sector

With the development of a social security system, the state-owned small enterprises, as well as the state-owned medium enterprises in chronic losses, will mostly or even entirely exit the state-owned sector, by means of bankruptcy and infusion of non-state owned sector, and become non-state owned enterprises or enterprises with the state being an ordinary shareholder. Enterprises with the state being an ordinary shareholder are no longer state-owned enterprises, but are typical enterprises of mixed ownership. What is of greater significance is the promulgation of rules, regulations and policies concerning utilization of foreign investment in restructuring state-owned enterprises, or transferring the state-owned stocks and legal person stocks of the listed state-owned companies to foreign businesses, which will cause a wider range of state-owned enterprises to exit. The establishment of modern enterprise system and improvement of corporate governance will be expedited by selling state-owned property rights to foreign businesses or absorbing foreign investment, so as to realize sustainable development of enterprises with higher competitiveness.

(China.org.cn November 7, 2003)